Nike (NKE) reported an excellent set of results after the close last night. Headline earnings were $1.36 vs a street consensus of $1.21 (12.4% beat). I listened to the Nike earnings conference call and was really impressed with the strong business trends relative to the obvious dislocations we are seeing in the market and talk of global recession. Nike is one of the world’s strongest global brands and has a diversified business across both developed and emerging markets, across product categories such as footwear, apparel, and equipment, and across income demographics. If there was a global slowdown taking place right now it would be something that should impact Nike’s business. Basketball and running sneakers are mature categories in most countries.
Nike’s earnings were driven by strong sales trends around the world coupled with expense management, capital allocation through share buyback, and a tax rate which remains consistently low. Nike’s earnings per share were up 19% which is particularly impressive because the recent quarter cycled the World Cup last year which tends to boost sales. All regions had positive sales growth including Nike Japan which had its best quarter in a couple of years due to bounce back from the nuclear crisis. Nike’s business was positively impacted by a weak dollar last quarter which provided benefit in both Europe and Emerging Markets. Although currencies have provided a tailwind, Nike reports futures order business in constant currencies and the business actually improved from +12% last quarter to +13% this quarter. Nike has reported futures orders in its segment reporting since 2007 and I track the data regularly. For the current quarter, the +13% futures orders growth is the strongest Nike has reported since this data have been released. Huh????? What about the slowdown?
Nike’s business has tremendous pricing power, better than most consumer companies but the fact that Nike isn’t having issues passing this through is a bullish sign. Gross margins have come down for Nike based on the timing differences between input costs and price increases. Going forward the rate of decline in gross margins is already moderating and will continue to do so. The risks with Nike relate to a potential NBA strike and global recession. Despite these risks I have a positive longer term outlook for Nike as it is one of the stronger global brands that will see outsized growth in emerging markets. I believe the stock is a great longer term investment even after the 5% higher open they will experience on the strong results. The bullish thesis for Nike is a ROIC of 22.6%, tremendous free cash flow generations, strong sales growth, gross margins which will improve from here, with a buyback program in place. Moreover next year is an Olympic year with the London Olympics.
Nike’s currency neutral global futures orders growth:
2008/2009 crisis: -4.9%
Current quarter released last night for spring: +13% (all-time best growth rate)
- North America: +15%
- Western Europe: +3%
- Central Europe: +17%
- China: +22%
- Japan: -10%
- Emerging Markets: +21%